SUMMARY
Position: LONG
Upside target: R622.00
Recommended stop-loss: R535.00
RECOMMENDATION: BUY
Analysts:
Peet Serfontein, Tlamelo Ntabeni
British American Tobacco is one of the world’s leading tobacco groups, with brands sold in more than 180 markets. With more than 200 brands in its portfolio, BTI makes the cigarette chosen by one in eight of the world’s one billion adult smokers. The company holds robust market positions in each of its operating regions, and enjoys leadership in more than 50 markets.
British American Tobacco is regarded as a defensive play, with strong brands and pricing power. The business has also committed to its dividend pay-out, which shows confidence in the outlook and business model.
The share remains above its 200-day simple moving average. Continued price action above the 200-day classifies the long-term trend as bullish. The 200-day also acts as major support.
RSI (Relative Strength Index) forward calculations suggest the share target price of R650 as realistic. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. The current reading of the RSI is 52, confirming some upside price potential.
Technical analysis
We initially suggested the trade on 6 July 2021. The price action is forming a base (see the insert as well as the black parallel trendlines on the main chart). This makes the share attractive as an investing option.
The price is testing minor resistance (see the thin black trendline on the main chart). The expectation is that the price will break this resistance.
The recent sideways trajectory of the on-balance volume (OBV) indicates that money remains in the stock.
Our entry range is R535 to R567 or as close to the current reference price of R566.46 as possible. A fall below the suggested entry range suggests that a structural change in the trend has occurred, and provides reason to negate the trade idea.
Our upside target is set at R622 or 9.8% above the current level. An extension to R700 seems likely.
Time to exit is mid-October 2021. Keep the option open to extend the time exit should the price action unfold sideways.
A price below R535 (5.9% below current levels) is a major concern for downside potential, and is recommended as a stop-loss.
Long-term fundamental view
British American Tobacco is regarded as a defensive play with strong brands and pricing power. The company has also pivoted towards reduced-risk to-bacco / nicotine delivery products—such as vapour, heated tobacco, snuff, and moist snuff—which has grown to almost a third of sales.
Strong geographic and brand diversity is a key strength with a brand portfolio covering premium, mid-priced, and value-for-money offerings. The group also owns Reynolds American, which is the second-largest cigarette producer in the US.
Volume growth has been ahead of the rest of the market with Global Drive Brands doing particularly well. The exposure to emerging markets should support the continuation of this trend going forward.
The company also announced new sustainability targets, which include having 50 million consumers of non-combustible products by 2030, achieving carbon neutrality by 2030, and bringing forward existing 2030 environmental targets to 2025.
Risks to our fundamental view include a sharp deterioration in industry volumes, price competition in key markets, prolonged weak macroeconomic conditions, and forex depreciation within emerging markets.
Sector-specific risks also include regulation and excise tax increases as well as the risk of price wars, which could lead to margin squeeze.
